Can Sony Be Saved? Bad Decisions Stifle Onetime Innovator

Gaijin Howard Stringer fails spectacularly

What’s the matter with Sony? In a word, everything. It’s on the wrong side of a seismic shift in the consumer electronics industry, away from hardware (its strength) to software (its weakness). It’s had a disastrous run of choosing the wrong leaders. And it’s in the wrong country. Other than that, it’s all good.

When activist hedge fund manager Dan Loeb sent Sony CEO Kazuo Hirai a letter on May 13 announcing that his fund, Third Point, had become the company’s largest shareholder, with 6.5 percent of its shares, he was polite enough not to talk about all of that. Instead, he simply requested a board seat and the chance to pitch his idea to spin off the company’s entertainment division to unlock some of that proverbial shareholder value. The situation called for tact, and Mr. Loeb delivered it. This is delicate stuff, after all, asking Japanese executives to give a damn about their company’s shareholders.

Mr. Hirai said last week that the board would eventually get around to discussing Mr. Loeb’s proposals. It’s not like he’s totally backed into a corner, as Sony’s profits are set to rise this year—although that’s mainly due the depreciation of the yen, which appears over for the time being. But Mr. Loeb isn’t letting up, making his own announcement last week that he had upped his stake to 6.9 percent of the company and co-writing an op-ed in the Journal calling for more board seats for activist investors. The unfolding comedy of manners promises to be even more entertaining than the pathetic spectacle of Mr. Loeb catching former Yahoo CEO Scott Thompson in a lie about holding a computer science degree.

Whether Mr. Loeb ultimately gets anywhere with his spin-off proposal isn’t really the point. All that’s left is to rip the company apart and sell the individual pieces to the highest bidder. (Or, if you’re Michael Dell, to continue to try and make the laughable case that taking your company private in an LBO is the only way to save it from the position you put it in yourself.)

Investors concerned about Apple’s future need only look to Sony’s dramatic fall for a possible filmstrip of what’s to come. The holy grail of brand marketing, after all, is to convince consumers that they should keep buying your premium-priced product despite a glut of cheaper and perfectly acceptable alternatives. Apple did exactly that over the course of the past decade, but isn’t quite hitting the mark of late. Sony’s record is even more impressive: it pulled the feat off with the Walkman in the 1980s and the Discman after that, and it even managed to do so in one of the world’s largest commodity businesses—televisions—for decades. My family loved our Trinitron back in the day, even though it was a four-foot square box that weighed about 50 pounds.

But success breeds complacency, and Sony’s reaction to its overwhelming domination of the global electronics scene—which also included DVD players, for a time—did not depart from this time-tested pattern. It got lazy. It wasn’t that it stopped trying entirely—the MiniDisc and Blu-ray showed that the company kept aiming to extend the streak. And Sony’s gaming platform, the PlayStation, was a rare bright spot in recent years, but that division also became wayward before it should have, despite continuing explosive growth in the console-gaming market.

Management deserves the bulk of the blame. Akio Morita, Sony’s founder, is one of the industry’s visionaries. His worthy successor, Norio Ohga, honored the company’s traditions of innovation and creativity—and kept its market- and mind-share leads during his tenure. It was under Mr. Ohga’s handpicked successor, the insecure, narrow-minded Nobuyuki Idei, that things started falling off track. And kept falling: Businessweek named Mr. Idei one of the corporate world’s worst managers in 2005. After Howard Stringer took the reins that same year, the company proceeded to lose the last remnants of the winning culture it once had, and it spent the next seven years cluelessly lurching from crisis to crisis.

Bringing in a gaijin to run the joint was supposed to show that the company was serious about doing whatever it took. But this particular gaijin seemed to spend more time lunching at Michael’s than devising a save-the-company strategy, and he was easily distracted by the star power in the company’s music and movie divisions. He was also reportedly consumed with envy over longtime Sony Music chief Tommy Mottola’s awesome life. (Or at least so says Tommy Mottola himself, in his recent book Hitmaker: The Man and His Music.) As for his big ideas? Stringer thought 3D television would save the day, and he told TheWall Street Journal in 2010 that “it’s pretty hard to ignore us in the 3D world.” It wasn’t then, Howard, and it certainly isn’t now.

So Apple outflanked you? There’s no shame in that. It outflanked everyone. But you know you’re off your game when Microsoft out-innovates you, as the lumbering giant from Redmond, Wash., did in the console wars with its Xbox. Sony lost the lead in gaming through mismanagement of the franchise, including the unforgiveable sin of not making enough units to meet holiday demand. Sony’s PlayStation 2 sold some 150 million units and was as dominant as the Walkman (and then the iPod) used to be. The PS3? 77 million.

The turning point for Sony was October 23, 2001, the day that Steve Jobs got on a stage and announced the iPod. These things become clearer in time, but it was hard to miss it in the moment itself. A consumer technology—and a music-related one at that!—that didn’t come from Japan?

Sony also pulled a General Motors, getting seduced by the returns from the finance side of the business, which always starts with the perfectly reasonable idea of lending your customers money to buy your products. It’s when the fish eats the whale—did you know that Sony sells life insurance?—that a loss of focus inevitably ensues. The next thing you know, Dan Loeb is knocking on your door with a couple of questions he’d like to ask.

Of course, it’s not all Sony’s fault. If we’re throwing blame around, we might as well blame the entire country. It wasn’t too long ago that Japan was the world’s greatest manufacturing plant—from Sony’s televisions and Walkmans to the world’s best-selling cars.

In the analog era, manufacturing edge was all that mattered. Consider the PlayStation. If you think about it, all the software in the console gaming space resided in the cartridges, not in the hardware itself. But the console was the anchor of that ecosystem, and Sony was better at making them than anybody else.

So what changed? Two things. With an aging society and gigantic government debt burden, Japanese politicians in the mid-1990s were forced to let the yen strengthen dramatically. The resulting higher cost of buying Japanese opened the door to the first true manufacturing competition the country had faced in a generation—first from Taiwan, then Korea and finally from the big dog itself, China.

Products like the PC and the mobile phone can be thought of as made up of two distinct parts—the one in which the intellectual property resides and the one in which there is none. In PCs, Microsoft and Intel own all the IP, and all that remains—flat-panel screen, disk drives and memory—are commodities. Likewise mobile phones: in an iPhone, for example, Apple (software) and Qualcomm (radio and processor) own most of the IP, and the rest—flat screens and memory—are low-margin spoils.

Japan once owned commodity manufacturing like nobody’s business. But now it doesn’t. Who made your flat-panel TV? Probably not Sony. More like Samsung. Taiwan and Koreamake all the memory chips these days. And China can beat anyone when it comes to the low end of anything. A few decades ago, Japan stole the mantle from the U.S. as the world’s greatest country at making things. But now it’s been stolen from it in turn.

The second thing that changed was the emergence of software as the dominant force, not just in PCs, but in smartphones, tablets and beyond. So it’s a double-whammy: Japan’s margins at the high end of electronics manufacturing have been squeezed due to its weakness at software, while at the same time it has lost its entire position at the other end of it—commodities—to its neighbors. And Sony never even saw it coming.

But how could it? It’s not a software company, after all. People ask the same question about Kodak. How on earth did the world’s most dominant brand in film not end up owning digital photography? Because it’s not the same business, that’s how. Digital photography is a software game. Kodak was, for all intents and purposes, a chemical company.

Bob Dylan is still signed to Sony Music, so all is not lost. But Sony stock has still been hit hard of late. It traded for 7,000 yen as recently as 2007. It’s at 2,000 yen now. It didn’t help that Mr. Stringer, the CEO for much of that time, was an awful manager from the very start and didn’t get any better over time. But it wasn’t just him: like many Japanese companies, Sony has a rigid corporate bureaucracy that simply couldn’t change course fast enough when it saw Apple and Samsung in its rearview mirror. It would rather sweep problems under the carpet and focus on keeping up appearances. And it’s probably too late now. Dan Loeb is too polite to say so—like Michael Dell, he’s talking of a bright future, if only … But he’s not interested in saving the company. He’s just trying to make a few bucks before it plays its last song.